February 19, 2013 01:58 PM UTC

Eyes on Enefit: Moody’s downgrades oil shale “leader” bond rating to negative

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• by: checks-and-balances

This blog is the first in a series about Enefit, and Eesti Energia, covering the company’s financial outlook, background and status of its Utah project.

Last month, the benchmark credit agency Moody’s downgraded the bond rating of the world’s largest oil shale company Eesti Energia, to negative.

The downgrade is the second in just over a year by Moody’s.

For several decades, Eesti Energia, an Estonian government owned corporation has been extracting oil shale and primarily using it to power Estonia’s electricity needs.

Eesti Energia is Estonia’s largest employer and considered a world leader in processing oil shale using a proprietary retorting technology.

According to Moody’s, the most recent downgrade reflected:

The evolving “business risk profile” of the company, and its inability to maintain profitability “given CO2-intensive oil-shale based generation assets.”

In their press release, Moody’s executives wrote:

An increasing proportion of Eesti Energia's business comprises [oil shale] activities, which Moody's considers carry higher risk compared with the group's core utility services.

Put bluntly, the credit agency isn’t confident Eesti Energia can make oil shale profitable. This is the same problem that’s defined oil shale for over a century. In December 2011, Moody’s dropped Eesti Energia’s investment grade from to Baa1, from A3 – an action that designated the company a “moderate credit risk”, and placed it at the bottom half of Moody’s investment rating scale.

The downgrade reflects Eesti Energia's weakening financial profile in the context of an increase in higher risk activities undertaken by the company following the partial opening of the Estonian electricity market.

Enefit, a subsidiary of Eesti Energia, operates in the U.S. and owns the largest privately held oil shale deposit in Utah, where it has been working to extract and process oil shale. Earlier this year, we blogged about how Estonian government investors were starting to express serious concerns at the prospect of losing $100 million from their government’s heavy investment in Enefit’s Utah project.

These serious doubts of oil shale’s viability demonstrate that a responsible approach to oil shale is one that requires oil shale companies, like Enefit, to demonstrate they can safely and responsibly extract energy from oil shale before their industry is given access to more public land. And, from the perspective of the financial markets, Enefit and oil shale have a long way to go.